Have you come across the “paid when paid” clause as a subcontractor? Here is what it means and how it affects you.
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The “paid when paid” clause can cause some stick for a subcontractor. Boiled down, it means that payment due to the subcontractor for work done only becomes due when the contractor actually receives payment from the employer and then can pay the subcontractor. A variation on this is the “paid if paid” clause, which leaves the subcontractor stranded if the contractor doesn’t receive payment.
It is clear how this clause can cause problems for the subcontractor. This is why it’s vital to go through any contracts with a fine-tooth comb. The general rule is that if you have to sign it, you have to read it.
Typically, what you’ll see in regard to this clause is:
“Payment to the subcontractor shall be subject to the contractor having received payment from the employer of the amount certified in its interim payment certificate and become due for payment by the contractor to the subcontractor upon receipt of such payment by the contractor from the employer.”
What this means is that you may have to wait longer than you’d like to for the money owed to you for the work done. It’s clear to see why this can become problematic.
In order for the subcontractor to get paid, the following steps need to be completed first:
- the subcontractor completes work on an interim basis
- they make an application for certification
- they have their works certified
- they transmit a tax invoice detailing the amount certified and
- finally, once the employer makes payment to the contractor then the contractor will process payment to the subcontractor.
This has an impact on cash flow. It also means that the contractor can delay payment by informing the subcontractor that payment from the employer has not yet been received, so, “If I haven’t been paid, then I can’t pay you,” becomes a tired refrain that subcontractors often hear.
If you, as the subcontractor, suspect that the contractor has already been paid, but is holding out on paying you, you now have to hunt for evidence that the contractor has been paid. This may mean going directly to the employer to get confirmation.
This clause is used in South Africa, however, it’s been outlawed in many jurisdictions outside of South Africa.
What can you do?
Negotiate your subcontracts properly with amendments that mitigate the risk of a strict “paid when paid” situation. If the contractor is reluctant to consider this kind of amendment, it may be a greater risk for the subcontractor to take on.
If you would like to read an in-depth analysis of this clause, click here for an informative article by Alex Goddard from construction specialists MDA Attorneys.
Source:MDA Construction Attorneys
